The risk-free rate is the market interest rate demanded for loans to an entity with the lowest possible credit risk. Usually that means a rich and stable government (e.g. the US federal government).
So what rate does the market demand for loans to Western governments? Let’s take a look at, say, 1-year bond rates. In the US that’s about 0.25% per year, in Germany that’s negative 0.08% per year, in the UK about 0.34% per year, etc.
All in all, that’s pretty much zero.
Oh, thanks. My mind was at a completely different place when I was reading your comment. Recently I was thinking about how one could use this situation to borrow money on mortgage, then try a startup. Worst case, the startup fails, you return to a job and pay the money back to bank, but the interests are small, so it’s not a big problem.
A part of what you wrote even seemed to fit into this context (by taking greater risk you could make more money, sure), but the last sentence interpreted in this context meant that as an employee you are unable to save money. Which felt… unlikely, so I asked. Glad I did.
Not sure I understand what you mean. Could you please explain this last sentence?
EDIT: Okay, I think I found the answer, but is that really that bad for an average person?
The risk-free rate is the market interest rate demanded for loans to an entity with the lowest possible credit risk. Usually that means a rich and stable government (e.g. the US federal government).
So what rate does the market demand for loans to Western governments? Let’s take a look at, say, 1-year bond rates. In the US that’s about 0.25% per year, in Germany that’s negative 0.08% per year, in the UK about 0.34% per year, etc. All in all, that’s pretty much zero.
Oh, thanks. My mind was at a completely different place when I was reading your comment. Recently I was thinking about how one could use this situation to borrow money on mortgage, then try a startup. Worst case, the startup fails, you return to a job and pay the money back to bank, but the interests are small, so it’s not a big problem.
A part of what you wrote even seemed to fit into this context (by taking greater risk you could make more money, sure), but the last sentence interpreted in this context meant that as an employee you are unable to save money. Which felt… unlikely, so I asked. Glad I did.